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02/23/96 DAVID SPILLYARDS v. A. ROBERT ABBOUD

February 23, 1996

DAVID SPILLYARDS, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED AND DERIVATIVELY ON BEHALF OF HARTMARX CORPORATION, PLAINTIFF-APPELLANT,
v.
A. ROBERT ABBOUD, LETITIA BALDRIGE, JEFFREY COLE, RAYMOND FARLEY, ELBERT HAND, MILES MARSH, CHARLES MARSHALL, SAM SEGNAR, HARVEY WEINBERG, DONALD P. JACOBS, AND HARTMARX CORPORATION, AS DEFENDANT AND NOMINAL DEFENDANT, DEFENDANTS-APPELLEES.



APPEAL FROM THE CIRCUIT COURT OF COOK COUNTY. HONORABLE LESTER FOREMAN, JUDGE PRESIDING.

As Corrected February 28, 1996.

The Honorable Justice Gordon Delivered The Opinion OF The Court: McNULTY, P.j. and Cousins, Jr., J., concur.

The opinion of the court was delivered by: Gordon

JUSTICE GORDON DELIVERED THE OPINION OF THE COURT:

Plaintiff, David Spillyards, an individual shareholder of defendant, Hartmarx Corporation (Hartmarx), appeals from the dismissal, pursuant to section 2-619 of the Code of Civil Procedure (735 ILCS 5/2-619 (West 1992)), of his third amended class action and derivative complaint and amended rule 224 petition (134 Ill. 2d R. 224). Plaintiff's complaint *fn1 was brought against the defendant directors of Hartmarx who allegedly approved the sale of a minority block of Hartmarx common stock to Traco International, N.V. and issued an unrelated false and misleading prospectus. Plaintiff's derivative counts alleged that the defendants breached their fiduciary duties by engaging in self-dealing for the purpose of entrenchment by approving the Traco transaction (count I); by making allegedly false statements in a July 17, 1991 prospectus unrelated to the Traco transaction (count II); by failing to "shop" the Traco transaction (count III); and by conspiring to commit the breaches alleged in counts I, II, and III (count IV). Plaintiff's class counts (counts V through VIII) virtually mirrored the allegations in counts I through IV but alleged damage to the putative class rather than the corporation. The trial court dismissed the complaint finding plaintiff's claims were derivative and could not be brought since the plaintiff failed to allege a pre-suit demand on the Hartmarx board of directors or particularized facts showing why demand was futile.

Plaintiff's appeal raises the following issues: (1) whether plaintiff's claims were derivative, individual or both; (2) whether plaintiff's derivative claims alleged sufficient facts to show that pre-suit demand upon Hartmarx's board of directors would have been futile; and (3) whether plaintiff's complaint stated causes of action for breach of fiduciary duty by engaging in self-dealing, failing to "shop" the minority block of stock, and conspiracy. *fn2 These issues will be determined by application of the substantive law of Delaware since Hartmarx is incorporated in that state. Seinfeld v. Bays (1992), 230 Ill. App. 3d 412, 595 N.E.2d 69, 172 Ill. Dec. 6; Libco Corp. v. Roland (1981), 99 Ill. App. 3d 1140, 426 N.E.2d 309, 55 Ill. Dec. 334 (on issues related to corporate governance, Illinois courts apply the law of the state of incorporation).

[The following material is nonpublishable under Supreme Court Rule 23.]

[The preceding material is nonpublishable under Supreme Court Rule 23.]

II. Standing *fn3

A. Classification of Claims

In reviewing the merits of the instant appeal, we note that motions to dismiss pursuant to sections 2-615 and 2-619 admit all well-pleaded facts together with all reasonable inferences which can be gleaned from those facts. (E.g., Reuben H. Donnelley Corp. v. Brauer (1995), 275 Ill. App. 3d 300, 655 N.E.2d 1162, 211 Ill. Dec. 779 (section 2-615); American Health Care Providers, Inc. v. County of Cook (1994), 265 Ill. App. 3d 919, 638 N.E.2d 772, 202 Ill. Dec. 904; Mayfield v. ACME Barrel Co. (1994), 258 Ill. App. 3d 32, 629 N.E.2d 690, 196 Ill. Dec. 145 (section 2-619).) They do not, however, admit conclusions of law or conclusions of fact unsupported by allegations of specific fact upon which those conclusions rest. (E.g., Barry Mogul & Associates v. Terrestris Development Co. (1994), 267 Ill. App. 3d 742, 643 N.E.2d 245, 205 Ill. Dec. 294; American Health Care Providers, Inc. v. County of Cook.) A motion to dismiss pursuant to section 2-615 attacks the legal sufficiency of the complaint whereas a section 2-619 raises defects or defenses which negate plaintiff's cause of action completely or refute crucial conclusions of law or conclusions of material fact that are unsupported by allegations of specific fact. ( Illinois Graphics Co. v. Nickum (1994), 159 Ill. 2d 469, 639 N.E.2d 1282, 203 Ill. Dec. 463.) In ruling on the latter motion, the court may consider pleadings, discovery documents and affidavits submitted by the parties. (American Health Care Providers, Inc. v. County of Cook.) Appellate review of a dismissal pursuant to either section is de novo (Kedzie & 103rd Currency Exchange, Inc. v. Hodge (1993), 156 Ill. 2d 112, 619 N.E.2d 732, 189 Ill. Dec. 31; American Health Care Providers, Inc. v. County of Cook) and does not require deference to the trial court's reasoning (e.g., Waterford Executive Group, Ltd. v. Clark/Bardes, Inc. (1994), 261 Ill. App. 3d 338, 633 N.E.2d 1003, 199 Ill. Dec. 207; Employers Mutual Companies v. Skilling (1994), 256 Ill. App. 3d 567, 629 N.E.2d 1145, 196 Ill. Dec. 301.) On review, the appellate court must consider whether a genuine issue of material fact should have precluded dismissal or, absent such issue of fact, whether dismissal is proper as a matter of law. Kedzie & 103rd Currency Exchange, Inc. v. Hodge.

The plaintiff's complaint alleged that the individual defendants, other than Elbert Hand (who was president, chairman and chief executive officer), served as directors of Hartmarx and received annual retainers of approximately $20,000 and certain stock options. The complaint stated that, since November 30, 1989, Hartmarx revenues, market and book values "significantly declined." Hartmarx's net worth, which was $303 million in 1991, declined to $64.6 million as of August 31, 1992. For the quarter ended August 31, 1992, Hartmarx reported a $213 million loss, bringing total losses for the past 10 consecutive quarters to $328,145,000.

The complaint further alleged that on or about September 18, 1992, Hartmarx entered into an agreement with Traco International, N.V., whereby, for a total aggregate payment of $30 million, Traco purchased 5.7 million shares of new Hartmarx common stock (18.3% of the outstanding common stock). In addition to the stock, Traco received two seats on Hartmarx's board of directors and the right to purchase an additional 1.6 million shares of common stock over the following three years. As a condition of the sale agreement, Traco was required to vote its common stock for the director nominees of Hartmarx's board of directors and Traco was required to refrain from any public efforts to control or influence the management, board of directors, or policies of Hartmarx. The defendant directors approved the terms of the agreement by a special meeting, held by telephone conference, on Sunday, September 20, 1992 in what the plaintiff alleges "appears to be Defendant Directors' attempt to counteract the huge losses in net worth and the resulting precarious position of Hartmarx.

Additional averments alleged that Traco was controlled by Abdullah Bakhsh who had a professional and/or personal relationship with defendant director A. Robert Abboud and that Bakhsh was "widely known to be a passive investor." The plaintiff also alleged that the voting restrictions provided in the agreement evidenced the defendant directors' "attempt to maintain and perpetuate control of the Corporation and to entrench the current Defendant Directors" since Traco, the largest shareholder, was required to vote for the board's nominees for directors.

Further allegations stated that the Traco transaction necessitated a board amendment to a provision in the stockholder's "Rights Agreement." (That provision gave Hartmarx shareholders the right to purchase shares of Hartmarx common stock at a 50% discount exercisable when an "acquiring person" obtained more than 15% of the company's outstanding shares.) The plaintiff alleged that the defendant directors sought to "avoid triggering" the "Rights Agreement" and "manipulated" that agreement by amending the definition therein of an "acquiring person" to specifically exclude the Traco transaction.

Attached to plaintiff's complaint, as an exhibit, was a copy of the minutes for the board of director meeting held on September 20, 1992. *fn4 The minutes showed that the Traco transaction had been negotiated by outside legal counsel and a special committee appointed by the board of directors consisting of three outside directors. The minutes also disclosed that, prior to approving the terms of the Traco transaction, the directors were advised by Hartmarx's outside legal counsel and by investment bankers from The First Boston Corporation, Hartmarx's financial advisors. Hartmarx's legal counsel advised the board that approval of the transaction required amendments to the corporation's stockholder rights plan and the corporate by-laws. Representatives from The First Boston Corporation indicated that the Traco transaction was "fair" and recognized the need for Hartmarx to obtain additional equity "to help [it] renegotiate its senior debt, and to provide financial flexibility and additional book equity." According ...


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